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The Bitcoin Bubble Is Not a Bad Thing

Written by Luke Burgess
Posted August 18, 2017 at 7:29PM

Bitcoin is in a bubble.

But that's not unexpected. Nor is it necessarily a bad thing.

In fact, I'd even say the Bitcoin bubble is a good indicator that the digital currency will remain a relevant part of the future market.

The truth is, market bubbles are highly misunderstood. To a layman, a bubble burst might mean the complete collapse of a market. Of course, as investors, we know that's simply not true.

Prices for things bubble and burst all the time. Yet their markets continue.

Just consider the most famous market bubble of all time: Dutch Tulipmania

The Dutch market for tulips became so hot in the 17th century that a single bulb could sell for more than 10X the annual income of a skilled craftsman. Then, the market drastically collapsed.

But the market for tulips did survive over the long term. Today the demand for the flower is so large that tulip production in the Netherlands is at a record high.

tulip field

Consider the internet bubble of the late 1990s. Or the video game bubble and crash of the early 1980s. Both of these markets are doing just fine today.

Or consider the housing market. It bubbled and crashed in 2008. But it obviously did not completely wipe out the market for houses.

Point is, even if Bitcoin prices collapse today, the market may still continue tomorrow.

Of course, that's not to say that the market for all things has long-term staying power after a bubble.

The Pet Rock and disco, for example, went through a bit of a bubble in the mid-1970s. Yet there is little to no market for these things today.

pet rock

We could also consider any number of other fads that have come and gone through the years. But with a market cap of over $70 billion right now, I think we can consider Bitcoin well beyond just a fad at this point.

Fidget spinners are a fad. Governments and major financial institutions aren't researching fidget spinner technology to work into their own systems. They are researching blockchain and distributed ledger technology.

So simply being in a bubble is not necessarily a bad thing. Nor is it unexpected.

I believe price bubbles are a normal part of pricing behavior of a new asset like Bitcoin. Here's what I mean...

When a new asset is first introduced, its real value is unknown. It ultimately needs to be tested. And that's where speculators step in.

If speculators believe a new asset will be worth more in the future, their demand will drive up prices. And in a free market, this is simply what causes bubbles. But this is also what allows new assets to be properly valued.

Speculators test the upper limits of a new asset's value. Without this test, the market wouldn't be able to properly value a new asset.

Let's again consider the video game bubble of the 1980s and internet bubble of the 1990s. Both video games and the internet were almost brand new in their time.

Video games had been around in the 1960s, but advances in microchip technology opened the market up to retail sales of home game consoles in the late 1970s. But speculators really had no way of knowing the demand for the home game console market at the time. They could only guess.

Seeing the failures of being overzealous in the home console market, a trading card company stepped in and revolutionized the industry. You know it today as Nintendo. The market tested the upper limits and found a workable middle ground.

nes

In the same way, the internet was around before it really became popular. But again, advancements in technology, communications, and networking opened the internet up to a wide retail market. And again, speculators tested the upper limits of the market to find its true value.

Back to 17th century Dutch Tulipmania for a minute...

The tulip first became fashionable in France, where early modern ladies of the aristocracy began sporting the flower on their dresses. From there, the tulip became the flower to show off social status and wealth. But that's only half of what caused the bubble.

In the 17th century, formal futures markets were first developed in the Dutch Republic. And even though tulips were not new, the futures contracts for tulips were brand new. Speculators tested the upper limits of the tulip futures of the time, resulting in the price bubble.

The housing market bubble and crash of 2008 is a bit different. The housing market went through a paradigm shift as a result of low interest rates and subprime loans. But again, the market was tested to its upper limits.

Let's consider the gold bubble of the 1970s. Again, gold was not a new asset at the time. However, the gold market went through a paradigm shift following the collapse of Bretton Woods. What followed was a global valuation.

I believe price bubbles show the market testing the upper limits of an asset's value and are not necessarily a bad thing, unless you buy at the top, of course. In fact, I think large price bubbles are good indicators that an asset will remain a relevant part of the future market. 

So Bitcoin's price bubble isn't a bad thing. It's really a requirement.

For me, I don't care if the price of Bitcoin goes up or down. I've figured out how to profit either way.

You see, despite Bitcoin's market value, the network needs to be maintained. I've found one company that provides the majority of the "picks and shovels" of this network. I call it Bitcoin's "printing press" manufacturer.

I've recently produced an entire video about this manufacturer, which you can check out here.

Until next time,

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Luke Burgess

follow basic@Lukemburgess on Twitter

As an editor at Energy and Capital, Luke’s analysis and market research reaches hundreds of thousands of investors every day. Luke is also the investment director of Angel Publishing’s new Secret Stock Files newsletter, which helps investors leverage the future supply/demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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